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| DWCH > SEC Filings for DWCH > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
GENERAL
The Company does not provide forecasts of its future financial performance. However, from time to time, information provided by the Company or statements made by its employees may contain "forward looking" information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward looking statements and are made under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any such forward looking-statements, which speak only as of the date they are made. The Company disclaims any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in the Company's expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. The Company's actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2008, as well as the accuracy of the Company's internal estimates of revenue and operating expense levels.
Datawatch is engaged in the design, development, manufacture, marketing, and support of business computer software primarily for the Enterprise Information Management market which incorporates business intelligence, enterprise content management and service management solutions to allow organizations to access and analyze information in a more meaningful fashion.
The Company's principal products are Business Intelligence Solutions (including Monarch, Monarch Data Pump, Monarch RMS, Monarch BI Server, Datawatch ES, Datawatch Researcher, Visual Insight, iMergence and VorteXML), Content Management Solutions (including Datawatch BDS, Datawatch BDS Workflow and Datawatch MailManager) and Service Management Solutions (including Visual QSM and Visual HD). Included in the above categories are: Monarch, a desktop report mining and business intelligence application that lets users extract
The Company offers its enterprise products through perpetual licenses and subscription pricing models. Subscriptions automatically renew unless terminated with 90 days notice following the first year of the subscription term. The subscription arrangement includes software, maintenance and unspecified future upgrades including major version upgrades. The subscription renewal rate is the same as the initial subscription rate. During the three months ended June 30, 2009 and 2008, revenues under the subscription model were $120,000 and $159,000, respectively. During the nine months ended June 30, 2009 and 2008, revenues under the subscription model were $376,000 and $452,000, respectively.
CRITICAL ACCOUNTING POLICIES
In the preparation of financial statements and other financial data, management
applies certain accounting policies to transactions that, depending on choices
made by management, can result in different outcomes. In order for a reader to
understand the following information regarding the financial performance and
condition of the Company, an understanding of those accounting policies is
important. Certain of those policies are comparatively more important to the
Company's financial results and condition than others. The policies that the
Company believes are most important for a reader's understanding of the
financial information provided in this report are:
· Revenue Recognition, Allowance for Bad Debts and Returns Reserve
· Income Taxes
· Capitalized Software Development Costs
· Goodwill, Other Intangible Assets and Other Long-Lived Assets
· Accounting for Stock-Based Compensation
During the three and nine months ended June 30, 2009, there were no significant
changes in the Company's critical accounting policies. See Note 1 to the
Company's condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q and in its Annual Report on Form 10-K for the year ended
September 30, 2008 for additional information about these critical accounting
policies, as well as a description of the Company's other significant accounting
policies.
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a percentage of total revenues for the periods indicated. The data has been derived from the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q. The operating results for any period should not be considered indicative of the results expected for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2008.
Three Months Ended Nine Months Ended
June 30, June 30,
2009 2008 2009 2008
REVENUE:
Software licenses and subscriptions 54.7 % 54.0 % 55.9 % 54.2 %
Maintenance and services 45.3 % 46.0 % 44.1 % 45.8 %
Total Revenue 100.0 % 100.0 % 100.0 % 100.0 %
COSTS AND EXPENSES:
Cost of software licenses and
subscriptions 12.1 % 9.6 % 10.9 % 9.5 %
Cost of maintenance and services 16.4 % 17.9 % 16.5 % 18.8 %
Sales and marketing 31.7 % 37.3 % 33.4 % 35.8 %
Engineering and product development 10.1 % 12.2 % 11.8 % 12.9 %
General and administrative 22.7 % 22.7 % 21.7 % 21.4 %
Impairment of goodwill and other
intangible assets 0.0 % 0.0 % 42.5 % 0.0 %
Total costs and expenses 93.0 % 99.7 % 136.8 % 98.4 %
INCOME (LOSS) FROM OPERATIONS 7.0 % 0.3 % (36.8 )% 1.6 %
Interest income and other income
(expense), net (1.1 )% 1.7 % 0.7 % 1.4 %
INCOME (LOSS) BEFORE INCOME TAXES 5.9 % 2.0 % (36.1 )% 3.0 %
Provision (benefit) for income taxes 0.1 % 0.4 % (1.6 )% 0.6 %
NET INCOME (LOSS) 5.8 % 1.6 % (34.5 )% 2.4 %
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Three months ended June 30, 2009 Compared to Three months ended June 30, 2008
Total Revenues
The following table presents total revenue, total revenue decrease and percentage change in total revenue for the three months ended June 30, 2009 and 2008:
Three Months Ended
June 30, Increase Percentage
2009 2008 (Decrease) Change
(In thousands)
Software licenses and subscriptions $ 2,605 $ 3,116 $ (511 ) -16.4 %
Maintenance and services 2,160 2,659 (499 ) -18.8 %
Total revenue $ 4,765 $ 5,775 $ (1,010 ) -17.5 %
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The overall net decrease of $511,000 in software license and subscription
revenue for the three months ended June 30, 2009 consists of a $440,000 decrease
in Business Intelligence Solutions (including Monarch, Monarch Data Pump,
Monarch RMS, Monarch BI Server, Datawatch ES, Datawatch Researcher, Visual
Insight, iMergence and VorteXML products) and a $106,000 decrease in Service
Management Solutions (including Visual QSM and Visual HD products) which was
partially offset by a $35,000 increase in Content Management Solutions
(including Datawatch BDS, Datawatch BDS Workflow and Datawatch MailManager
products). The $440,000 decrease in Business Intelligence Solutions is primarily
due to decreased Monarch license sales as compared to the three months ended
June 30, 2008.
The overall decrease of $499,000 in maintenance and services revenue consists of a $344,000 decrease in Service Management Solutions (including Visual QSM and Visual HD products) and a $189,000 decrease in Content Management Solutions (including Datawatch BDS, Datawatch BDS Workflow and Datawatch MailManager products) which were partially offset by a $34,000 increase in Business Intelligence Solutions (including Monarch, Monarch Data Pump, Monarch RMS, Monarch BI Server, Datawatch ES, Datawatch Researcher, Visual Insight, iMergence and VorteXML products). Maintenance and services revenue for the Service Management Solutions product line decreased due to lower maintenance revenue of $186,000 and lower professional services of $158,000. Maintenance and services revenue for the Content Management Solutions product line decreased due to a decrease in maintenance revenue of $142,000 and a decrease in professional services revenue of $47,000. Maintenance and services revenue for the Business Intelligence Solutions product line increased due to higher maintenance revenue of $55,000 offset by decreased professional services revenue of $21,000.
Costs and Operating Expenses
The following table presents costs and operating expenses, increase (decrease)
in costs and operating expenses and percentage changes in costs and operating
expenses for the three months ended June 30, 2009 and 2008:
Three Months Ended
June 30, Increase Percentage
2009 2008 (Decrease) Change
(In thousands)
Cost of software licenses and subscriptions $ 574 $ 556 $ 18 3.2 %
Cost of maintenance and services 783 1,031 (248 ) -24.1 %
Sales and marketing 1,510 2,156 (646 ) -30.0 %
Engineering and product development 483 704 (221 ) -31.4 %
General and administrative 1,084 1,310 (226 ) -17.3 %
Total costs and operating expenses $ 4,434 $ 5,757 $ (1,323 ) -23.0 %
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The increase in cost of software licenses and subscriptions of $18,000, or approximately 3%, is primarily due to increased amortization of capitalized software related to new product releases which were partially offset by lower royalty costs associated with lower sales of Monarch.
The decrease in cost of maintenance and services of $248,000, or approximately 24%, is primarily due to lower employee-related costs due to decreased headcount and related costs.
The decrease in sales and marketing expenses of $646,000, or approximately 30%, is attributable to lower external consulting costs, a reduction in travel-related costs and lower wages attributable to lower headcount as compared to the same period last year.
The decrease in engineering and product development expenses of $221,000, or approximately 31%, is primarily attributable to software development costs related to new product offerings which were capitalized.
The decrease in general and administrative expenses of $226,000, or approximately 17%, is primarily attributable to lower auditing fees, lower compliance costs associated with the Sarbanes-Oxley Act and fees associated with other consulting services performed during the period.
Interest income and other income (expense) includes the following components:
interest income, gains or losses on foreign currency transactions and, for
fiscal year 2008, a gain on the dissolution of the Company's French subsidiary
(Datawatch France SARL). Interest income for the three months ended June 30,
2009 was
Income tax expense for the three months ended June 30, 2009 was $4,000 as compared to $22,000 for the three months ended June 30, 2008. Income tax expense for the three months ended June 30, 2009 primarily represents a provision for uncertain tax positions relative to foreign taxes. Income tax expense for the three months ended June 30, 2008 primarily represents deferred tax expense related to the difference between the tax and book basis of the tax-deductible goodwill generated by the Company's acquisition of the business assets of IDARS, which was subsequently determined to be fully impaired based upon an interim impairment assessment performed at March 31, 2009. Additionally, for the three months ended June 30, 2008, the Company recorded provision-to-return adjustments and a provision for uncertain tax positions relative to foreign taxes, the net effect of which was a reduction in the Company's income tax liability of approximately $7,000.
Net income for the three months ended June 30, 2009 was $275,000 as compared to net income of $91,000 for the three months ended June 30, 2008.
Nine months ended June 30, 2009 Compared to Nine months ended June 30, 2008
Total Revenues
The following table presents total revenue, total revenue decrease and percentage change in total revenue for the nine months ended June 30, 2009 and 2008:
Nine Months Ended
June 30, Increase Percentage
2009 2008 (Decrease) Change
(In thousands)
Software licenses and subscriptions $ 8,419 $ 9,605 $ (1,186 ) -12.3 %
Maintenance and services 6,640 8,110 (1,470 ) -18.1 %
Total revenue $ 15,059 $ 17,715 $ (2,656 ) -15.0 %
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The net decrease of $1,186,000 in software license and subscription revenue for the nine months ended June 30, 2009 consists of a $968,000 decrease in Business Intelligence Solutions (including Monarch, Monarch Data Pump, Monarch RMS, Monarch BI Server, Datawatch ES, Datawatch Researcher, Visual Insight, iMergence and VorteXML products), a $206,000 decrease in Service Management Solutions (including Visual QSM and Visual HD products) and a $12,000 decrease in Content Management Solutions (including Datawatch BDS, Datawatch BDS Workflow and Datawatch MailManager products). The $968,000 decrease in Business Intelligence Solutions is primarily due to a reduction in Monarch sales during the current fiscal period.
The net decrease of $1,470,000 in maintenance and services revenue consists of a
$1,133,000 decrease in Service Management Solutions (including Visual QSM and
Visual HD products), a $276,000 decrease in Content Management Solutions
(including Datawatch BDS, Datawatch BDS Workflow and Datawatch MailManager
products) and a $61,000 decrease in Business Intelligence Solutions (including
Monarch, Monarch Data Pump, Monarch RMS, Monarch BI Server, Datawatch ES,
Datawatch Researcher, Visual Insight, iMergence and VorteXML products).
Maintenance and services revenue for the Service Management Solutions product
line decreased due to a reduction in maintenance revenue of $510,000 and lower
professional services of $623,000. Maintenance and services revenue for the
Content Management Solutions product line decreased due to lower maintenance
revenue of $289,000 which was partially offset by higher professional services
of $13,000. Maintenance and services revenue for the Business Intelligence
Solutions product line decreased due to lower professional services revenue of
$200,000 which was partially offset by higher maintenance revenue of $139,000.
Costs and Operating Expenses
The following table presents costs and operating expenses, increase (decrease)
in costs and operating expenses and percentage changes in costs and operating
expenses for the nine months ended June 30, 2009 and 2008:
Nine Months Ended
June 30, Increase Percentage
2009 2008 (Decrease) Change
(In thousands)
Cost of software licenses and
subscriptions $ 1,635 $ 1,678 $ (43 ) -2.6 %
Cost of maintenance and services 2,491 3,328 (837 ) -25.2 %
Sales and marketing 5,025 6,344 (1,319 ) -20.8 %
Engineering and product development 1,781 2,290 (509 ) -22.2 %
General and administrative 3,268 3,788 (520 ) -13.7 %
Impairment of goodwill and other
intangible assets 6,401 - 6,401 -
Total costs and operating expenses $ 20,601 $ 17,428 $ 3,173 18.2 %
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The decrease in cost of software licenses and subscriptions of $43,000, or approximately 3%, is primarily due to reduced royalties attributable to lower Monarch sales which were partially offset by amortization expenses of capitalized software costs.
The decrease in cost of maintenance and services of $837,000, or approximately 25%, is primarily due to lower employee and travel-related expenses and decreased international consulting costs.
The decrease in sales and marketing expenses of $1,319,000, or approximately 21%, is primarily attributable to cost savings resulting from lower headcount and employee-related costs.
The decrease in engineering and product development expenses of $509,000, or approximately 22%, is primarily attributable to capitalized software development costs in 2009 for new product releases.
The decrease in general and administrative expenses of $520,000, or approximately 14%, is primarily attributable to lower auditing fees, lower compliance costs associated with the Sarbanes-Oxley Act and lower headcount and employee-related costs.
Impairment of goodwill and other intangible assets of $6.4 million is attributable to the full impairment of the Company's goodwill totaling $6,116,000 and an indefinite lived trademark totaling $285,000 which was recorded in the second quarter of fiscal 2009. In conducting its interim impairment analysis at March 31, 2009, management took into account the effects of the global economic recession, including among other factors, that Company revenues were lower than expected in the three months ended March 31, 2009. The results of the impairment analysis at March 31, 2009 indicated that the Company's book value exceeded its estimated fair value and that the Company's goodwill was fully impaired. Therefore, the Company recorded a non-cash impairment charge of approximately $6.1 million. The results of the Company's interim impairment analysis of its indefinite lived trademark also indicated that a trademark was fully impaired at March 31, 2009 and therefore, the Company recorded a non-cash impairment charge of approximately $285,000.
Interest income and other income (expense) includes the following components:
interest income, gains or (losses) on foreign currency transactions and a gain
on the dissolution of the Company's French subsidiary (Datawatch France SARL).
Interest income for the nine months ended June 30, 2009 was $30,000 as compared
to $104,000 for the nine months ended June 30, 2008. The decrease in interest
income was the result of lower interest rates available from banks in the United
States and United Kingdom. Gain on foreign currency
Income tax benefit for the nine months ended June 30, 2009 of $236,000 was primarily attributable to the reversal of the Company's deferred tax liability of $319,000 related to its goodwill from the IDARS acquisition which was determined to be fully impaired at March 31, 2009. Income tax provision for the nine months ended June 30, 2008 primarily represents deferred tax expense related to the tax-deductible goodwill generated by the Company's acquisition of the business assets of IDARS. The goodwill resulting from this transaction was deductible for tax purposes and a deferred tax expense was recognized for financial reporting purposes equal to the tax rate on the excess of tax amortization over the amortization for financial reporting purposes.
Net loss for the nine months ended June 30, 2009 was ($5,194,000) or $(0.88) per diluted share. Excluding the effects of the goodwill and trademark impairment charge, net income for the nine months ended June 30, 2009 would have been $889,000, or $0.15 per diluted share, as compared to $421,000, or $0.07 per diluted share, for the nine months ended June 30, 2008.
OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The Company leases various facilities and equipment in the U.S. and overseas under non-cancelable operating leases that expire through 2011. The lease agreements generally provide for the payment of minimum annual rentals, pro rata share of taxes, and maintenance expenses. Rental expense for all operating leases was approximately $78,000 and $98,000 for the three months ended June 30, 2009 and 2008, respectively, and $241,000 and $347,000 for the nine months ended June 30, 2009 and 2008, respectively.
As of June 30, 2009, contractual obligations include minimum rental commitments under non-cancelable operating leases as follows:
More than 5
Contractual Obligations: Total Less than 1 Year 1-3 Years 3-5 Years Years
(in thousands)
Operating Lease
Obligations $ 442 $ 249 $ 191 $ 2 $ -
Other Liabilities $ 119 $ - $ - $ - $ 119
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The Company is also obligated to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Royalty expense included in cost of software licenses was approximately $385,000 and $452,000, respectively, for the three months ended June 30, 2009 and 2008 and $1,180,000 and $1,346,000, respectively, for the nine months ended June 30, 2009 and 2008. The Company is not obligated to pay any minimum amounts for royalties.
On August 11, 2004, the Company acquired 100% of the shares of Mergence Technologies Corporation. The purchase agreement includes a provision for quarterly cash payments to the former Mergence shareholders equal to 10% of revenue, as defined, of the Datawatch Researcher and Visual Insight products until September 30, 2010. The Company expensed approximately $1,000 and $3,000 for the three months ended June 30, 2009 and 2008, respectively, and $5,000 and $4,000 for the nine months ended June 30, 2009 and 2008, respectively.
The Company's software products are sold under warranty against certain defects in material and workmanship for a period of 30 days from the date of purchase. If necessary, the Company would provide for the estimated cost of warranties based on specific warranty claims and claim history. However, the Company has never incurred significant expense under its product or service warranties. As a result, the Company believes the estimated fair value of these warranty . . .
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